High Net Worth Divorce and Private Equity: Key Considerations
Divorces involving high-net-worth individuals (HNWIs) often present unique complexities, particularly when assets include private equity interests. Unlike cash or publicly traded shares, private equity assets—such as carried interest, limited partnership stakes, and co-investments—are often illiquid, contingent on future performance, and subject to restrictions on transfer. These factors pose significant challenges in valuation and division during divorce proceedings.
This guide explores how private equity assets are treated in high-net-worth divorce cases, focusing on valuation, legal strategies, and the role of specialist lawyers. While international considerations and asset protection mechanisms are relevant, the primary legal framework discussed here is that of England and Wales.
If your divorce involves international assets or the potential to file for divorce outside of England and Wales, we recommend you contact us to discuss the specifics of your case.
Understanding Private Equity Structures in Divorce
Private equity professionals typically derive their wealth from a combination of salary, bonuses, and investment returns. Key components of their remuneration that are relevant in divorce include:
Carried Interest: A share of the fund’s profits, typically around 20%, earned by fund managers if returns exceed a certain threshold. Carried interest is often subject to vesting schedules and performance conditions.
Limited Partnership Interests: Private equity professionals may have direct stakes in funds as limited partners, meaning they hold ownership interests that may appreciate over time.
Co-Investments: These are direct investments made alongside the fund, often on preferential terms, with potential for significant upside but limited liquidity.
The treatment of these assets in divorce depends on factors such as when they were acquired, their structure, and the contributions made by each spouse during the marriage.
It is therefore also crucial to understand the lifetime of any particular PE fund in which a party has an interest as timing will be very important.
Valuing Private Equity Assets in Divorce
Valuation is a central issue in divorces involving private equity. Unlike liquid assets, private equity stakes do not have an easily ascertainable market value, and their worth may be contingent on future performance. Courts and financial experts employ several methods to assess their value:
1. Expert Valuation Reports
Forensic accountants and valuation experts assess the present value of carried interest, partnership stakes, and co-investments. Discounted cash flow (DCF) analysis is a common approach, accounting for expected future payouts and applying risk adjustments. Given the speculative nature of carried interest, valuations often incorporate discounts for illiquidity and uncertainty.
2. Deferred Sharing (Wells Sharing)
Rather than fixing a valuation at the time of divorce, courts may order that an asset be shared if and when it pays out. This approach, known as Wells sharing (from the case Wells v Wells), is often used for contingent assets such as carried interest. For example, a spouse may be awarded 30% of any carried interest received from a fund in which the other spouse holds an interest as and when it is received by the other spouse. While this ensures fairness, it also prolongs financial ties post-divorce.
3. Immediate Offset (Lump Sum Buyout)
In some cases, courts prefer to value private equity interests at the time of divorce and offset the spouse’s share with other assets. This may involve applying a discounted valuation to reflect uncertainty and illiquidity. A lump sum settlement provides closure, but there is a risk of undervaluing the asset if it later appreciates significantly.
4. Structured Payments
A hybrid approach may involve structured payments over time, potentially contingent on the actual realisation of private equity profits. This balances fairness with flexibility but can be complex to administer.
Courts weigh multiple factors when determining valuation, including the nature of the private equity interest, its maturity stage, and the ability to achieve a clean financial break.
Legal Strategies in High-Net-Worth Divorce Cases
Specialist divorce lawyers employ a range of strategies to either protect private equity assets from division or secure a fair share for the non-holding spouse.
1. Characterisation of the Asset (Marital vs. Non-Marital Property)
A key argument in private equity divorces is whether carried interest and partnership stakes constitute marital or non-marital assets. English law follows the principle that assets acquired during the marriage are subject to equal division, while pre-marital and post-separation assets may be excluded or treated differently.
Courts assess whether a private equity interest was earned primarily due to efforts made during the marriage or whether it represents future earnings. In B v B [2013], the court distinguished between carried interest from funds established during the marriage (subject to division) and carried interest from funds raised post-separation (excluded from division). More recent cases, such as A v M [2021], have refined this approach by apportioning carried interest based on fund timelines.
2. Valuation Manipulation and Disclosure Issues
Private equity professionals may attempt to manipulate valuations or defer fund distributions to reduce their apparent wealth at the time of divorce. Courts have broad powers to investigate financial disclosure, and any attempt to obscure assets may result in adverse inferences or asset freezing orders.
3. Pre-nuptial and Post-nuptial Agreements
Pre-nuptial agreements (pre-nups) and post-nuptial agreements (post-nups) can provide clarity on the treatment of private equity assets in divorce. While not automatically binding under English law, courts will generally uphold such agreements if they are fair, freely entered into, and made with full disclosure.
A well-drafted pre-nup can specify that carried interest and private equity interests remain separate property, reducing litigation uncertainty. Given the unpredictable nature of private equity returns, agreements may also include provisions for compensatory lump sums or structured payments.
4. Forum Selection and Jurisdiction Considerations
The jurisdiction in which a divorce is filed can have a significant impact on the financial settlement. England is often seen as a favourable jurisdiction for non-earning spouses due to its emphasis on fairness and equal sharing. In contrast, other jurisdictions may take a more restrictive approach to asset division.
While this paper focuses on English law, international considerations are critical when assets are held offshore or when spouses have ties to multiple jurisdictions. The timing of filing and strategic jurisdiction selection – in order words in which country you file for divorce - can influence the outcome significantly.
The Role of Specialist High-Net-Worth Divorce Lawyers
Engaging an experienced divorce lawyer is essential in cases involving private equity assets. Specialist lawyers provide value in several key areas:
1. Expertise in Complex Asset Structures
Private equity remuneration involves complex financial instruments that require legal expertise to interpret. A skilled lawyer understands fund structures, vesting schedules, clawback provisions, and transfer restrictions, ensuring that all relevant assets are properly disclosed and assessed.
2. Strategic Settlement Negotiation
Many high-net-worth divorces are resolved through negotiation rather than litigation. An experienced lawyer can structure settlements that balance liquidity needs, risk allocation, and long-term financial security. Creative solutions, such as hybrid lump sum and deferred sharing arrangements, can provide both parties with certainty and fairness.
3. Tax and Financial Planning
Divorce settlements involving private equity assets may have significant tax implications. Lawyers work alongside tax advisors and forensic accountants to optimise asset division and minimise tax liabilities. Considerations include capital gains tax, income tax on future distributions, and structuring settlements to maximise efficiency.
4. Confidentiality and Reputation Management
High-net-worth divorces often attract media attention. Private equity professionals, in particular, may seek discretion to protect investor confidence and business interests. Lawyers can negotiate confidentiality clauses and, where appropriate, opt for arbitration or private financial dispute resolution (FDR) hearings instead of public court proceedings.
Best Practices for Private Equity Professionals Facing Divorce
For private equity professionals, proactive planning can mitigate the financial risks of divorce. Best practices include:
Pre-nuptial/Post-nuptial Agreements: Clearly define the treatment of private equity assets in the event of divorce.
Transparent Financial Records: Maintain clear documentation of fund interests, capital contributions, and vesting timelines.
Legal and Financial Advice: Engage specialist divorce lawyers and financial experts early in the process.
Consideration of Settlement Options: Weigh the benefits of lump-sum payments versus deferred sharing arrangements.
Tax and Estate Planning: Ensure that asset transfers are structured tax-efficiently.
Conclusion
Divorces involving private equity assets require careful legal and financial planning due to the complexity and future-contingent nature of these assets. In England and Wales, courts aim to achieve fairness, but the division of carried interest and fund stakes presents challenges in valuation and structuring settlements. Engaging a specialist lawyer with expertise in high-net-worth divorces is crucial to navigating these complexities and securing the best possible outcome.
Our team of specialist family lawyers have years of experience handling complex high net worth divorces. Engaging with a specialist lawyer early in divorce proceedings can have a significant bearing on the outcome of your financial settlement. To speak to one of our partners call us on 020 7242 6000.
To speak to an experienced family lawyer about your case call us on 020 7242 6000.